Oil prices are still a bit shy of their all-time nominal highs, but they are rising daily, and at this rate we could see $145/bbl oil again (the high-water mark in mid-2008) before the year is out. As the chart above shows, peaks in oil prices have a strong tendency to coincide with recessions. Is this causation or coincidence? I would argue that high oil prices are not the cause of recessions, but rather are symptomatic of the easy money and rising inflation that have lead the Fed to tighten monetary policy—and it is tight money that has caused almost all recessions. Regardless, should we worry about a double-dip recession because of rising oil prices today? For one, I seriously doubt we’ll see a recession anytime soon, because monetary policy is not going to be tight enough to cause a recession for a long time. On the contrary, monetary policy is currently very accommodative, and this significantly mitigates the negative impact of rising energy prices.

This is the question. Obviously the inflation-shy Europeans are taking strong cues from the oil market and (apparently) embarking on a tightening campaign (we find out tomorrow!).

We’re not as confident as Grannis is that the Fed won’t go into tightening mode sooner rather than later, given the political climate and the vocal hawks on the board, but it’s no wonder everyone is now obsessed with the question of what the Fed will do next.

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